Regina Nethery – Vice President Investor Relations Bruce Broussard – President and Chief Executive Officer Brian Kane – Senior Vice President and Chief Financial Officer Jim Murray – Executive Vice President and Chief Operating Officer Christopher Todoroff – Senior Vice President and General Counsel.

Joshua Raskin – Barclays David Windley – Jefferies A.J. Rice – UBS Matthew Borsch – Goldman Sachs Peter Costa – Wells Fargo Securities Kevin Fischbeck – Bank of America Sarah James – Wedbush Scott Fidel – Deutsche Bank Ralph Giacobbe – Credit Suisse Ana Gupte – Leerink Partners Christine Arnold – Cowen.

Good morning. My name is [ph] Melissa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Humana First Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

[Operator Instructions] Thank you. I will now turn the call over to Ms. Regina Nethery. You may begin your conference..

Thank you, and good morning. In a moment, Humana's senior management team will discuss our first quarter results and our of dated earnings outlook for 2015. Participating in today's prepared remarks will be Bruce Broussard, Humana's President and Chief Executive Officer, and Brian Kane, Senior Vice President and Chief Financial Officer.

Following these prepared remarks, we will open up the lines for question-and-answer session with industry analysts. Joining Bruce and Brian for the Q&A session will be Jim Murray, Executive Vice President and Chief Operating Officer and Christopher Todoroff, Senior Vice President and General Counsel.

We encourage the investing public and media to listen to both managements' prepare my remarks and the related Q&A with analysts. This call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, humana.com, later today.

This call is also being simulcast via the Internet along with the virtual slide presentation. An Adobe version of today's slide deck has been posted to the Investor Relations section of Humana's website. Before we begin our discussion, I need to advise call participants of our cautionary statements.

Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in this morning's earnings press release as well as in our filings with the Securities and Exchange Commission.

Today's press release, our historical financial news releases, and our filings with the SEC are all available on Humana's investor relations website. Call participants should also note that today's discussion and slide presentation include financial measures that are not in accordance with generally accepted accounting principles.

Management's explanation for the use of these non-GAAP measures is included in today's slide presentation as well as a reconciliation of GAAP to non-GAAP financial measures. Finally, any references to earnings per share or EPS made during this morning's call refer to diluted earnings per common share.

With that, I'll turn the call over to Bruce Broussard..

Good morning, everyone, and thank you for joining us. This morning, Humana and announced first quarter 2015 adjusted earnings per share of $2.47, up 5% from the first quarter of last year. Our pre-tax earnings of $744 million were a record high, and we believe are a clear demonstration on the progress we continue to make as a company.

Further, we continue to have confidence in our full year guidance for adjusted earnings of $8.50 to $9 per share.

Our more significant achievements during the quarter included substantial membership growth in our Medicare Advantage standalone PDT and HumanaOne one products, the recent launch of our population health technology business, Transcend Insights, announcement of the pending sale of our Concentra business, and completion of our $500 million accelerated share repurchase program.

I'll begin with our Medicare Advantage growth. As we shared with you last quarter, we experienced another successful Medicare enrollment season for 2015. Individual Medicare Advantage membership at March 31, 2015 was up 11% versus the end of the fourth quarter 2014, up 14% year-over-year.

We continue to see the positive impact for our members of stability in our value proposition as well as high star quality ratings. A recent Mackenzie study on the 2015 star ratings concludes that HMO plans perform best on an enrollment weighted basis. Approximately 56% of our individual members are in HMO plans compared to 53% a year ago.

Further, the Mackenzie study indicates that plans built around integrated delivery networks achieve higher average star ratings. CMS recently eliminated certain fixed thresholds for four-star ratings for 2017 bonus year.

These changes may result in some pressure on our overall star ratings, but we believe we will sustain our solid competitive advantage. We expect we will maintain our high quality ratings due to our successful integrated care delivery model.

Our model includes use of data analytics to engage members and preventative measures and wellness programs that close clinical gaps and care. In some, we believe the combination of a solid value proposition and a high quality ratings are critical to attracting new membership and retaining our existing membership base.

Our projected 2015 net new membership gains of approximately 12% including a voluntary retention rate of approximately 90% are all helping to validate this belief. CMS has also recently released its final Medicare rates for 2016.

While we were encouraged by the average rate increase for the first time in seven years, this average still lags fee for service medical cost trends.

Additionally, CMS's transition to the new risk adjustment model will negatively impact certain of our markets that are leading the country in value-based reimbursement methods and holistically assisting members with multiple complex chronic conditions, both of which are key goals for CMS.

As we prepare our Medicare bids for 2016, we will seek to minimize any disruption that rate changes may cause to Medicare beneficiaries while holding firm on our 4.5% to 5% pre-tax margin target. The continuing investment in our clinical model are expected to provide some offsets to rate pressures. That will vary, of course, from market-to-market.

Those investments were highlighted this month by Humana At Home's acquisition of Your Home Advantage, a leading provider of nurse practitioner in home visits.

Additionally, we believe our focus on the consumer experience and our proprietary market point distribution channel will be important elements in solidifying our relationship with our members as we face these rate challenges at the market level. Turning to our standalone PDP offerings.

We also experienced significant growth for these products with membership up 10% since the end of 2014 and 14% to the first quarter of last year, primarily in our low price point offerings. I now will spend some time on our investments in healthcare exchanges and state-based contracts.

We're pleased that HumanaOne membership has continued to grow nicely. While we continue to project at least breakeven results for our HumanaOne business, our projected increased reliance on the 3Rs is driven primarily by the results for the State of Georgia and our out-of-network provider usage. We believe both are isolated and addressable.

Brian will discuss each of these factors in his remarks. Entering a new customer segment is never an easy task. However, we believe that healthcare exchanges are a leading example of the ongoing movement to the retail model where we have been so effective in Medicare.

We continue to be highly targeted in terms of where we will participate in healthcare exchanges, with a strong emphasis on current Medicare Advantage markets to enable customer migration as members' life situations change.

Our expansions in the healthcare exchanges and our state-based contracts are deepening our partnership with local providers, local market providers as we develop local market scale through multiple product offerings.

State-based Medicaid membership was now includes those members associated with dual demonstration programs is up significantly, both on a sequential basis and year over year. We continue to monitor the RFP pipeline and plan to pursue other state-based opportunities later in 2015.

These opportunities would not be as viable if it weren't for our integrated care delivery model. Importantly, we continue to show progress in key integrated care delivery model metrics. Some examples include the number of individual Medicare Advantage members covered by value-based arrangements is now more than 54%.

This is particularly encouraging given the substantial increase in membership this quarter. Membership in our Humana chronic care program is up 10% since the end of the year and 56% versus the prior year.

Adoption of mail-order pharmacy among our members continues to grow as we highlight this benefit more fully during the sales process and welcome calls. Individual Medicare Advantage mail-order penetration is now on an average approaching 35%.

We continue to focus on reaching out to members with gaps in care and have sent over 4 million proactive messages to 2.5 million members to prevent gaps in care. These actions have resulted in a gap closure rate of more than 30%.

As the leader in both the development and execution of value-based payment models and technology driven population health management analytics, we support trends that encourage care coordination across all payers.

In that context, this quarter, we launched Transcend Insights, which leverages the population health capabilities we have developed in our Medicare Advantage business. Our goal is to provide payer agnostic tools to provider partners allowing more of our members to be in value-based reimbursement models.

As we've shared with you in the past, value-based arrangements have proven to lead to higher HEDIS scores, lower medical costs, and higher members' CHIP satisfactions. Before closing, I'd like to spend a moment on our recently announced sale of Concentra.

As we have said in previous calls, we review our various businesses on an ongoing basis to ensure each earns its cost of capital and is aligned with our integrated care delivery strategy. The Concentra acquisition was part of a multi-pronged approach to increase our capabilities of managing risk through primary care physicians.

Our subsequent MSO acquisitions and joint venture investments provided a more integrated primary care platform than Concentra. Although it did not ultimately fit strategically, we were able to achieve an attractive price that will result in a gain versus our initial investment. Brian will speak more to the details of this transaction in his remarks.

We expect the transaction will close in the next few weeks. I want to thank all of our Concentra associates for their dedication to the consumer and to our company. Several of you have asked for an update on our PBM evaluation.

That work continues, and we expect to provide a full debriefing on our analysis during the third quarter earnings call in November.

In summary, we believe our robust organic membership and revenue growth together with our proven superior clinical operating performance and disciplined capital allocation all come together to provide our sustainable competitive advantage.

Excluding the onetime gains that we expect from the Concentra sale, we continue to expect our full year adjusted earnings per share to be in the range of $8.50 to $9 and look forward to providing you updates as the year progresses. With that, I'll turn the call over to Brian for a more detailed discussion of our financials..

the increase in our projected 3R receivables for the year, medical utilization and prior-period development, days and claims payable and cash flows from operations, the earnings implications of the Concentra transaction, and capital allocation. Let's begin with our exchange business in the premium stabilization programs commonly called the 3Rs.

Our conviction in our healthcare exchange strategy remains strong. We continue to focus on our key growth markets by offering high-value networks to drive affordability and access for our customers.

We believe that this strategy has been effective in successfully establishing a new growth business while providing a compelling product that our members value.

Over time, we believe that HumanaOne will not only contribute meaningfully to our results but it will also, as Bruce emphasized, advance our objectives of local market presence and scale with providers while allowing us to offer a range of products that are relevant to our customers no matter their age or income circumstance.

As with any start-up business, we've had our successes as well as our challenges. In terms of successes, our ACA compliant membership for HumanaOne is up 38% from the end of 2014, well ahead of our previous expectations. This was driven by better than forecast sales and lower than anticipated attrition.

Consequently, we have adjusted our aggregate HumanaOne guidance to reflect higher projected membership in the ACA compliant business which we also believe results in us approaching the scale we need for long-term success.

We continue to forecast that we will have at least breakeven results in 2015 and earn a reasonable return on capital in 2016, albeit that achievement of breaking results this year now includes higher reliance on the 3Rs than previously anticipated coming into 2015.

As you've seen from our release, we've increased our net 2015 3R guidance range to $450 million to $550 million with reinsurance accounting for approximately 75% and risk adjustment and risk corridors accounting for approximately 25% of the total.

As we have discussed in the past, there is an interplay between risk adjustment and risk corridors in that if we don't get the risk adjustment exactly right, the meaningful part of the balance, either positive or negative, is captured through the risk corridors.

As we evaluate our financial performance to date, including runoff claims from 2014, the drivers of the increase in full year receivables related to the 3Rs are quantifiable and addressable. The first two Bruce mentioned in his remarks are higher than anticipated out-of-network utilization and poor results in our Georgia market.

The last driver of the higher receivables is simply a function of having more members than we had previously expected. I'll start with out-of-network utilization. As the exchanges were rolling out across the nation, we believed there would be a time period during which our members will be getting accustomed to our efficient network products.

Consequently, we permitted out of network utilization for the small proportion of our members who did not stay in network to avoid disruption notwithstanding the products design, which underpinned the affordability that our members seek.

Our provider network team has thoroughly evaluated our networks in light of our membership levels by markets, and we are very satisfied in our level of network adequacy.

As a consequence, we are in the process of implementing stricter enforcement of network utilization by working closely with non-network providers as well as educating our members on the product.

Higher levels of in-network utilization are anticipated to ensure the continued affordability of our healthcare exchange offerings as well as align with our pricing assumptions for the remainder of the year and for 2016.

After adjusting for the out-of-network usage, our markets across the country, including our largest HumanaOne market in Florida, are performing within expectations, with the notable exception of Georgia.

One of the challenges we faced in both 2013 and 2014 was the immaturity of the claims data we had available at the time we set our healthcare exchange pricing for the following year versus what we would've preferred, specifically, more detail regarding statewide market conditions and health status based on significant exchange claims data.

To help address this, we juxtaposed the limited Georgia claims data we had against claims data nationally for states that we believe had similar utilization patterns and mix of likely enrollees to derive assumptions from the population health of each state and, in turn, set our pricing.

Recent actuarial claims data for the state of Georgia now indicate that enrollees in the state as a whole are skewing more towards being a less healthy state population than we had believed and had priced four. Consequently, we are accruing both a risk adjustment and risk corridor receivable.

It's important to recall that this was the original intent behind the premium stabilization programs, namely early year protection in this circumstance.

We are, of course, incorporating our emerging experience into our actuarial assumptions and are taking the appropriate targeted actions through pricing and product design when we file our 2016 rates in the next few weeks to ensure that George's results will be back on track for 2016 without reliance on the risk corridors.

As I mentioned, the remaining driver of the higher 3R balance relates to higher than projected growth of our ACA compliant business. This will result in higher 2015 receivables than we had expected, primarily associated with reinsurance. Finally, a quick word on our 2014 3R accruals.

As you will see, we have decreased reinsurance by approximately $50 million and have increased our risk corridors by around $40 million as an offset. As we have evaluated the run out of a 2014 claims, fewer of our members anticipated will hit the reinsurance attachment point, which is the reason we have made this change.

Turning to medical utilization. We're watching very closely the hospital inpatient admissions per thousand data for our Medicare Advantage business. We have seen some of the hospital published data which suggests higher Medicare usage of inpatient services and have also witnessed in the last number of weeks an uptick in inpatient authorizations.

For Medicare Advantage, we have projected a decline year-over-year in-hospital missions, and for the first quarter, we have seen that decline bear out. In other words, our trend vendors continue to result in lower admissions.

However, during the last weeks of the quarter and into April, we are seeing an elevated level of authorizations for hospital admissions, which, although still declining, are slightly higher than we had anticipated.

Importantly, we have also seen data throughout the quarter that would suggest our cost per admit is lower than forecast, implying lower severity conditions are driving the admissions.

While it's too early to draw any conclusions from what I just described, especially as admissions tend to fluctuate, it is something that bears close watching as the actual claims experience develops over the coming months.

As was highlighted in this morning's press release, we did see a lower level of favorable prior-period development than in last year's first quarter. A meaningful portion of the lower prior-period development was unanticipated due to the PPD for the first quarter of 2014 having been unusually high.

And as a result of claims processing changes involving the implementation in early 2014 of a front end review for Medicare claims. Front end review enables us to improve the initial accuracy of claim payments, reducing the amount of overpayments recaptured later as part of prior-period development.

PPD was also adversely impacted by fourth quarter flu claims that came through in the first of 2015 across our lines of business. I will now turn to the balance sheet and operating cash flow. I'll start with days and claims payable, or DCP. You will note that we have revised the DCP table to exclude reinsurance associated with the 3Rs.

Given that reinsurance reduces benefits expense but does not impact the related benefits payable, it skews DCP trends over the three-year period of the program.

Days and claims payable during the first quarter of 2015 declined by less than a day, driven primarily by the typical first quarter increase in Part D claims associated with our Medicare Advantage business. That impact is included in the all other category of the DCP roll forward table in our press release.

Recall that our standalone PDP business is excluded from our days and claims payable calculation. Much like our standalone PDP offerings, our Medicare Advantage Part D benefit designs generally have the plan picking up substantially all the initial pharmacy claims but covering less of the benefit as the year progresses.

While the pharmacy expense associated with these members is in our DCP calculation, the related but payable is relatively small due to the speed of processing pharmacy claims.

Higher capitation and provider settlements also resulted in a slight decrease to DCP during the quarter, but importantly, this was more than offset by an increase in unprocessed and processed claims inventories. Cash flow from operations is down versus the first quarter 2014 as higher net income was more than offset by working capital items.

Specifically, the increase in benefits payable, which accompanies growing very membership, was smaller year-over-year due to the lower level of overall growth in average membership given the outsized growth we experienced in 2014. This pressured the cash flow from operations on a comparative basis by approximately $250 million in the quarter.

Working capital needs for our growing pharmacy business primarily accounted for the remainder of the delta in the first quarter cash flow. For the year, our operating cash flow guidance is largely unchanged.

Other than reducing operating cash flow by guidance, our cash flow guidance by proximally $200 million at the midpoint, primarily reflecting the increase in the 3R receivable that I just discussed previously as well as the pending sale of Concentra. Before closing, I'll spend just a few moments on capital allocation and earnings guidance.

As Bruce said in his remarks, we announced this quarter the sale of our Concentra business. The timing of the signing of the definitive agreement triggered the need to recognize the gain on the establishment of a deferred tax asset, and thus the $0.35 per share gain was included in our first quarter GAAP results.

We expect this transaction to close in the next few weeks, so we have included the full impact of the transaction in our earnings guidance, both from a GAAP and an adjusted perspective. For GAAP, we are including a total projected gain from the sale in the range of $1.35 to $1.45 per share including the $0.35 tax gain.

On an adjusted basis, excluding this onetime gain, we continue to forecast earnings per share in the range of $8.50 to $9 per share. The sale of Concentra is expected to generate net of taxes and deal expenses approximately $1 billion in net proceeds. Before any anticipated use of these proceeds, the sale will result in $0.11 of 2015 EPS dilution.

We continue to look for value enhancing acquisitions such as the Your Home Advantage deal we recently announced that will advance our in-home capabilities as well as pursue additional share repurchase opportunistically. However, given where we are in the year, it is likely that a good portion of this dilution will persist.

With respect to share repurchase, this quarter, we completed our $500 million accelerated share repurchase program. Additionally, holding true on our commitment to buy back $1 billion of stock by June of this year, we have entered into a 10b51 plan that we expect will complete that goal.

You will note however that we have raised our guidance slightly for the average fully diluted share count, due largely to the higher than anticipated buyback price which will have a several cent negative EPS impact.

Finally, our workaround optimizing our portfolio continues to ensure that each of our businesses fits strategically and earns its cost of capital. More generally, we are encouraged by our progress and our prospects, all driven by execution around our integrated care delivery strategy. With that, we will open the lines up for your questions.

And fairness to those waiting in the queue, we ask that you limit yourself to one question. Operator, please introduce the first caller..

Your first question comes from Joshua Raskin with Barclays..

Hi. Thanks. Good morning. I want to talk a little bit about the utilization transit you guys are monitoring. I just want to understand what exactly is driving that? I think you mentioned in public data from some of the hospitals, but I have to assume you're going off of more internal data.

So is there any specific lines of service or are there specific type of lives, any geographies or any new members? Do you have any color on where this utilization is coming from?.

Good morning, Josh. It's certainly from our own data that we're seeing a slight uptick in admissions over the last few weeks and into April. There's no specific geography that we would point to. It's something that we continue to evaluate.

I would note that interestingly, not only are the unit cost of these admits lower, which as I said in my remarks suggesting lower severity of claims, but also our outpatient utilization seems to be down and our pharmacy utilization is in line. And so it's very early really to ascertain exactly what this is telling us.

It's just something that we thought it would be important to communicate because it's something that we're watching very closely, and it's something that we always watch very closely..

Josh, just to build on what Brian talked about and the reason that he specifically addressed it in his opening remarks is as we saw this, we began to dive into a lot of the information relative to new members and what we call concurrent members.

And actually the new members that we just, that just join the plans, which were fairly significant, we're seeing actually better utilization than the concurrent members. So that gives us comfort that there wasn't an issue with any of the markets that we grew in.

A lot of the deep dives that we're doing, and there's a lot of work that we're trying to pull together, would suggest that there are some respiratory issues that we're facing.

So that leads us somewhat to a conclusion that it's maybe a longer extension of the flu, but a lot of work needs to be done to get our arms around it, but we feel very confident about how it's progressing, and we feel good about a lot of the things that we do from a process perspective. This looks like an isolated incident..

Okay. That's helpful, Jim. And I guess just maybe help us understand the magnitude here. If you take a look at this uptick in outpatient utilization within lower outpatient RX in line and maybe it's just flu.

I mean if this were to persist through April, May, June, is this enough to change guidance? Or is this just something that the pressure point and the reason we're still comfortable in a relatively wide range of EPS [ph]?.

Josh, I would say if this persists as we see it, it's not something that would impact guidance, but it's something that we watch very closely, obviously, to the extent there was a continued uptick and a greater uptick. That's something that would have an impact, but we're not seeing that right now..

Okay. Thanks..

No problem..

Your next question is from David Windley from Jefferies..

Hi. Thanks. I'm going to shift over to the HumanaOne.

I wanted to understand if your change in or lack of change in age distribution in that book of business in the slide that you presented to us last quarter, yet fairly significant change in medals for your distribution, if essentially that adverse selection had anything to do with your additional reliance on 3Rs?.

It's something we continue to evaluate. We certainly evaluate all of our medal tiers and try to understand where the utilization is coming from, particularly in Georgia where we've seen that. I think it's fair to say that we're going to continue to evaluate as we go into 2016 our participation in the various middle tiers.

And certainly our pricing will reflect the increased morbidity we are seeing in that block. I would also say that the out-of-network utilization is something that we think we can address in short order, and so that will not be a recurring issue going forward..

And on the out-of-network, just to follow up on that, is that something where you are essentially only lightly enforcing the existing policy or rule and now you're going to more stringently enforce? Or do you actually have to change the policy, and is that possible entry year?.

I would say the former. It's something that we lightly enforce as we're coming into this program with new product, with new customers; it was something that they were going to get accustomed to the product design.

Over the next few months, it's something that we will enforce the policy that exists, and that really, as I said my remarks, goes both to working with providers to the out-of-network providers and some of the reimbursement levels that we pay them as well as educating our customers as to the product that they bought.

We believe strongly that the strategy that we've pursued is one that allows our customers to have a very affordable and compelling product, and as we educate them, we think we will be able to get that out-of-network utilization under control..

Great. Thanks for taking the questions..

Your next question comes from A.J. Rice with UBS..

Hello, everybody. I'm going to go back to the comments that Bruce had made about there being some pressure for threshold eliminations on the STARS program.

Can you give us a little more color on how significant that would be and are we talking about something that would impact your potentially in 2017? Is that the right way to think about it? Or is there any reason it would impact earlier?.

This is Jim Murray. It would be 2017, and as many of you know, we're in the process today and for the next several weeks of finalizing a lot of the work related to the benefit year 2017. The threshold elimination puts a little bit of pressure and what that would translate into is the number of members that are in four-star or greater plans.

A lot of the feedback that we are getting; we have a team of people that comes before us every Friday to talk about the progress that we are making around a lot of the tactical steps that are part of this whole process that goes over this two-month period. We feel very good about where we are positioned.

Some pressure related to the elimination by CMS of the threshold, but frankly, feel pretty good about how things are playing out this year, and we should be favorable positioned relative to the competition, because we like a lot of the good work we do around the STARS program..

And, A.J, I think it's important to keep in mind that it is a relative measurement, and so our performance is highly predicated on everyone else's performance.

And I think as investors have seen over the past few years, our clinical capabilities have really outperformed the industry as a whole, and we continue to be confident that we will be able to continue to outperform even as these changes persist..

Okay. All right. Thanks a lot..

Your next question is from Andrew Schenker with Morgan Stanley..

Thanks. Good morning. I was just hoping to follow up on your comments around some may be some of the moving parts in guidance. It sounds like the concentric deal as you guys pointed out in the press release originally is about 11% headwind to earnings this year.

You also called out around the pressure around the impact from share repurchases related to the stock appreciation here, and now looking at guidance, it seems like the tax rate may have come down a little bit, but I'm just curious what some of the other moving parts were that let you feel confident to maintain your guidance range maybe versus where it was last quarter? Thanks..

I think you outlined some of the major issues that we are focused. Concentra will pressure earnings by $0.11. With the share repurchases tax rates and the like it's probably about $0.04, so it's a $0.15 headwind coming into this quarterly call. Again, we feel comfortable about reiterating our guidance of $8.50 to $9.00.

And really was going to drive that performance, as we said to the first question is where is utilization ultimately end up? And right now, we feel good about where we are, but that's something we're very focused on that will ultimately drive the year's numbers.

I think the important point on the Concentra sale is it is a timing issue for us versus a long-term business problem.

As we think about the sale, we think about it as that we are really allowing the company to redeploy assets that will advance us strategically at a price that we feel was a very good value for what we are doing, and now what we can do is take that and redeploy it, whether it's in capital structure alterations such as stock buybacks or acquisitions that will be more accretive long-term and strategically much stronger..

Thanks. Maybe if I could just squeeze one more in real quick. The Healthcare Services segment specifically, I hear a lot of moving parts related to Concentra as well as your Home Health [ph] acquisition.

If you could just maybe talk about how those kind of offset each other as well as maybe membership growth that allowed you to kind of maintain revenue guidance. And it seems like the only impact pre-tax results was related to the pre-tax gains. So just making sure I understand moving parts there as well. Thank you..

Sure. Well as you'll see in the Healthcare Services segment guidance, we did adjust the revenue numbers and the like to comport with a divestiture of Concentra. I would say more broadly that as I said in my remarks, that business is performing extremely well.

Membership is growing pretty dramatically based on largely our Medicare Advantage and PDP growth, but we're also seeing better engagement with our members both from a mail-order perspective on the pharmacy, which is very important, but also with Humana At Home as our analytical capabilities continue to identify people who would benefit from our Humana At Home capabilities.

And so the combination of those is really driving that performance. So we feel very good about the range we have out there for Healthcare Services pre-tax..

Thank you..

Your next question is from Matthew Borsch with Goldman Sachs..

Yes. If I could just ask a question about the individual market, just with two parts. Number one, the extent to which you are seeing in flow of new members coming into the exchanges generally for this year. A peer company of yours earlier today talked about seeing less in flow than they had expected.

Secondly, just on Georgia, how you reprice in that market and avoid getting stuck in sort of an adverse collections spiral?.

I think as far as new members, I think really is consistent with what we expected in terms of coming into the market and actually feel reasonably good about the overall pool for what we received.

With Georgia, there is no doubt, Matt, that there is something we are very focused on as you put in higher price increases or you're going to attract the wrong members. Part of that is going to go to product design in the middle tiers that we participate in. So we're very cognizant of that risk, and we're going to price appropriately..

Okay. Thank you..

Your next question comes from Peter Costa with Wells Fargo Securities..

Getting back to the individual business again, why do you think you had the problems in Georgia? One of your competitors reported earnings earlier that has a number of low-priced silver plans in Georgia. It didn't seem to share the problem that you guys are having there.

Do you think it's a local market related to you? Is it some cost disadvantage that you have in Georgia? And how do we avoid this from happening in another state down the road when the risk corridors and risk reinsurance goes away?.

Peter, this is Jim. I will take your question, and we wondered how long before you would dial-in. With respect to Georgia, as Brian said earlier, one of the things that we did at the very beginning was to take our individual legacy business and do relativities to our small group block of business, because that was a guarantee issue population.

We thought that was fairly close to what might ultimately happen on the exchanges. And after that, and that was done local market by local market, we evaluated morbidities across a national basis with the help of an outside consulting actuarial firm.

And as a result of that overall evaluation from a national perspective, we lowered some of our markets and expected morbidities. And with respects to Georgia, while other markets turned out just fine relative to that pricing philosophy, Georgia didn't.

Another part of the Georgia issue has to do with the platinum plans, which you have asked about in the past.

One of the things that we're seeing with the platinum plans is that the philosophy or the strategy that we've enumerated in the past with you and others is that you need to have documentable risk conditions for the members that are heavier utilizers, and as we study the Georgia population, as we're doing some of our risk adjustment work, we're seeing that the Georgia population, although heavier utilizers, don't have documentable risk conditions, which doesn't allow us then to get risk adjustment for them.

And as a result of that, as Brian said, not only in Georgia but also in other states, we're evaluating that requirement as it respects our platinum plan strategies going forward, and you'll see us take some actions relative to that..

That's helpful.

And what is your strategy for avoiding this going forward in other states?.

Well now we have a lot more actual claims information on which to set pricing, and so as we've done with all of our other products over the years, we're using actual claims to set our pricing, and so our pricing will be consistent with our desire that this block of business will produce a satisfactory return.

A lot of what we've done up to this point has been models and estimates based upon other lines of business. Now that we've gotten some real claims information relative to not only 2014 but 2015, that's how we will set our pricing going forward, and we feel very confident on our ability to properly set the right rates..

Will you offer platinum plans next year?.

We're going to evaluate that market-by-market and to the extent that it doesn't make sense because of what I talked about relative to documentable risk conditions. We'll evaluate that, and we'll act accordingly..

Thanks, guys..

Your next question comes from Kevin Fischbeck with Bank of America..

Great. Thanks. Just wanted to ask a little bit about the commentary in the Medicaid side of the business. The company seems to be more aggressively pursuing RFPs, I guess, that you have in the past.

Can you talk a little bit about your view kind of what's changed in the last couple of years? And you pursued RFPs in a couple of different ways outright or through joint ventures and things like that.

So how do you think about the form that these types of participation might take?.

I don't think our posture has changed relative to what we look at going forward. I think we continue to believe a partnership model in Medicaid makes sense in most states, if not all states, and we'll continue to do that.

We do look at states where we have existing membership, and as their RFPs come out, we want to participate in those RFPs, and that really has been the standard direction and strategy for us.

And our existing Medicaid results continue to meet expectations and continues to grow quite nicely, and so as we look at going forward, we continue to believe that the Medicaid platform is a platform that has partnership, a partnership model in states that we are operating at within today..

Okay. Great. Thanks..

Your next question comes from Sarah James with Wedbush..

Thank you. I'd like to go back to the out of network utilization portion of the 3R boost. It sounded like this was mainly something that pertained to new members transitioning onto an exchange product, and there has been some stricter network enforcement going on lately, and I guess going forward.

Should I think about this as really stepping into the 3Rs for just the first quarter and it adjusts going forward? Or is this something that's going to continue on through the year? And how can you modify your benefit designs in 2016 in a way that would improve this scenario?.

Well I would say it's going to impact the 3Rs for this year just given where we are with our performance and the like. When people go out-of-network, those are higher costs than we had anticipated and that drives the receivables.

As I mentioned in my remarks, we are working with these out-of-network providers both in terms of the reimbursable fees that we pay them in the fee schedules, contracting with them and the like, and it's also a matter of educating our members as to their product, the product that they have.

I would say we believe very deeply in the strategy of having these high-value networks that allows us to drive very affordable and attractive pricing to our members. And so those are really the puts and takes. It's a combination of provider and member education. So....

It's more education and less of financial incentives?.

Well I would say with the providers, there will be financial impacts and financial incentives to ensure that we pay the appropriate levels of reimbursement for what we call our non-par or nonparticipating providers. I should note it's a small number of members that are utilizing the benefit out of network.

To some extent, there might be some product design in terms of higher out-of-pocket costs for members who tend to go out of network, and that's something that we would be evaluating for next year.

But I think the combination of provider education, provider contracting, as well as member education and some tweaks in the product design, it's a problem that we think we can get our head around and saw for next year and frankly, the back half of this year as well..

Thank you..

Your next question is from Scott Fidel with Deutsche Bank..

Thanks. Just wanted to stick on the individual business, and I know you're talking about Georgia specifically, but just interested and how much you think you're going to need to be raising premiums on the exchange business more broadly.

If we look at your 3Rs accruals now for this year, they're right around a half billion for 2015, and I would calculate that on your sort of ACA compliant individual business, that equates to around 13% of revenue, so given that bowl of three insurance and risk corridors really sort of scale away over the next year or two, just help us think about how much sort of excess premium increases you're going to need to be implementing in order to reflect the expiration of those 2Rs of the 3Rs..

That's not a specific number for obviously competitive reasons. We wouldn't want to comment on it right now. I would say that certainly we have the 3Rs squarely in mind as we price for next year, we recognize there's one more year to go here with two of the 3Rs.

And so we're going to price such that as I said in my remarks we can earn an attractive return on capital in 2016 and beyond. So we understand the dynamics of the market and the 3Rs and the pricing required to do that, and we'll take the necessary steps to make sure we get the right financial return..

To Brian's earlier point, many of the markets are performing well, we've got some problems in the state of Georgia that we plan to address with our pricing and product design..

Okay.

And then just quickly, just on the Medicare, hospital admissions, how geographically broad-based are you seeing that? I mean, I'm just trying to tie that into the comments from CMS on their final 2016 rates call where they said that their actuaries have also seen some flattening out of the admissions trends and I would assume if CMS was highlighting that then was probably more of a broader base.

So just interested geographically on how much you're seeing that..

Yeah, I think is Jim said earlier, we wouldn't call any specific geographies. Where we were very focused was to see where we grew in particular markets and whether that more outsized growth was the cause of the slightly higher admits, and we haven't seen that, they're actually running pretty favorably.

So I would suggest it's a broad-based phenomenon that we're watching very closely..

Okay. Thank you..

Your next question comes from Ralph Giacobbe with Credit Suisse..

Thanks. Good morning.

Switching a little bit, you guys have reclassified segments, and I guess within the group book you've seen enrollment declines, I guess the question is how committed are you to this business I guess going forward? Is there any strategic review being contemplated for this segment? And I guess separately, just on the PBM, just want to clarify, you talked about sort of a full debrief on the 3Q call in November.

Just hoping to get a little more clarity on that. Is that just a final decision you expect at that point on whether you keep it or come up with some sort of outsourcing arrangement or the like? Thanks..

To your question on enrollment declines, we made the strategic decision a year or so ago, and I think we talked about that that with the large group business, we're going to wind that down over the next several years, because we are not a national player, and we can't compete in that space.

But we are focused on what we call our sweet spot of smaller case sizes. And over the last six months, we performed reasonably well with our sweet spot focus. You may recall that in the fourth quarter, we grew very nicely with our smaller, focused business.

This past quarter, we have seen some shrinkage in our fully insured smaller case of membership, as a lot of our competitors are implementing their new rates relative to community rating, and we are seeing a little bit of an aggressive posture in some of the states that we do business.

That will ultimately change over time, and we think that that will work itself out. We feel very confident with our focus on the smaller case size.

Over the next several years, we're going to be evaluating our Group business and again feel very good about its prospects for continued profitability, and it serves very nicely as a complement to our focus on local market scale.

We talk about that with our Medicare business, our individual business car Medicaid business and our Group business, in certain of what we refer to as bold move markets. So again, we feel very confident with our ability to compete and win with a smaller case size. Hopefully you will see that play out over the next several quarters.

I think even as the results show this quarter, we really have a three-pronged approach within Group. One is around continuing to increase our efficiency within the Group sector, and you can see that as you see our cost ratios coming down.

The second is to focus on where we probably have a better value proposition, and that's in the Small Group is what Jim talked about, our sweet spot, and begin to start exiting relationships that are not profitable for us and that traditionally is the larger ASO model.

And then the third is to continue to migrate customers to more of a consumer choice model within the markets that we are at, and that would be both a private exchange and public exchanges as we see that being both a long-term trend, and frankly, I think where we can even add more value with our retail capabilities that we've had in the past..

Okay, that's helpful.

And just on the PBM?.

As we said, the PBM, we're going to evaluate, and it's under continued evaluation. We've provided some updates in the past, but the full update will be in the third quarter of this year..

Thank you..

Your next question is from on Ana Gupte with Leerink Partners..

Thanks, good morning. So I just want to make sure I understand this. I am a little confused with everything. I'm getting a lot of questions from investors who are pretty confused as well.

On retail MLR, what exactly; is this the underlying and Medicare MLR, okay, ex-PYD, and this sort of late quarter potential uptick you are seeing, and is the deterioration, which is not great, but it is deteriorating; because your HumanaOne individual public exchange product is now going to be much more reliant on reinsurance and you're having all these issues?.

Yes. Again, Ana, if you look at our retail MER's for the quarter, and you adjust them for prior periods, they're actually down from prior quarters. So I think that's important to note. As we said, in the prior period we did have a pretty materially impact on our numbers. A lot of it was expected; some of it wasn't car related to the flu and the like.

But, when you look at the MER's, we feel pretty good about where we are on an incurred basis from an MER perspective. As I said, they are actually down. So I hope that answers your question..

Okay so MA has been displaced. On Individual, did you see any improvement on your off-exchange ACA compliant type MLR at all? Your competitors seem to be seeing what they said they would see. And so net-net on Individual, you had said you would see margin expansion ex-exchange, public exchanges.

What's going on in the rest of the book?.

Okay, again we don't break our ACA compliant off-exchange and on-exchange. I think when you adjust for the 3Rs, our MER is in line with our expectations, which is why, as I said in my remarks, that we are going to break even or better for 2015. That still is the case.

I'm sorry?.

No, sorry. Please go ahead..

I was going to say that the 3Rs truly help us in that regard, and it's higher than we anticipated for the reasons that we went through..

Okay, one final one if I may.

So then on HumanaOne, why you be in a place where you had some adverse selection last year, and as you're raising prices, are you seeing more of the deterioration in that book, because anyone who can afford or is relatively healthy might migrate someplace else and so you might have challenges just turning around the book?.

As respect to the state of Georgia, which we've talked about a couple of times, I wouldn't have said that it was adverse selection as opposed to the health condition of the entire population.

We just have to price reflective of the health condition, and that may cause some of those members to move on to other plans, but we've got to get our pricing commensurate with the risk conditions that we're assuming, and we think that we've got a pretty good plan in place not only to increase pricing but also evaluate some of the products that are in the marketplace..

Great. Thanks so much. Appreciate it..

And your final question is from Christine Arnold with Cowen..

Hey there. Thanks for taking the question. I'm trying to sort through what belongs in this year versus last year.

Was there any net prior-period negative development in the first quarter of this year related to last year in any products?.

I'm not sure I understand the question. There was – the prior-period development was positive this quarter based on 2014 in prior results. It was less positive than it was last first quarter in 2014.

That was largely expected for the reasons I discussed, i.e., it was a very high PPD quarter in the first quarter of 2014, and we implemented some claims processing changes with front end review in Medicare that drove some of the change. Some of that was unexpected. So there is positive PPD in our numbers just less than there was last year..

Okay. And then payables versus premiums, I agree we should exclude PDP but if we exclude PDP premiums, your payables versus premiums are still upside down in the first quarter. Now this could be because you've got more capitated costs. It could be because of other factors.

Can you help me understand why if you're seeing an increase in utilization, I would think you'd be booking more payables so than premiums. It put these issues with the individual, but it looks like that's not happening.

So can you help me sort through what other factors might be accounting for that?.

That comparison, change of premium versus change in claims payables, as we've discussed in the past is not something that we focus on. There are a lot of moving pieces that go into that number. As we have said, with regard to utilization, I wouldn't have made the statement as boldly as you just made it with regard to overall utilization.

What we pointed out, because it's important that we pointed out to be fully transparent is that we have seen that slight increase in admits over the recent weeks, and it's something that we're waiting to see how it plays through our claims lags over the coming months.

As you know, it takes a few months for those to work through, but I wouldn't have made the overall statement that utilization is up. Remember that our admits are actually down year over year. Our trend benders are working as we've said and so I wouldn't read into it anything more than that.

As you look for balance sheet quality and cash flow quality, the claims, the processed claims and unprocessed claims on a DCP basis are actually up, which I know is a measure that you and others look at.

And when you look at our cash flow for the year, which is where we focus because of the timing of these working capital issues that I went through, other than the 3Rs and of course Concentra, we're actually reasonably in line.

As you know, we took up our cash flow last quarter, and I think were it not for some of these other adjustments that I just discussed, we would be in pretty good stead there..

Thanks..

We appreciate the support the shareholders are providing us. We recognize that this quarter is a complicated quarter as a result of our Concentra sale, as a result of some of the changes in the comparison.

But we do believe it is a quarter that continues to reconfirm the organization strategy around our growth in retail and in addition the integrated delivery model. So in conclusion, as always, we thank our 60,000 associates that help us bring these results to life every day, and we appreciate the shareholder support.

So thank you, and we look forward to continuing our conversations later. Thank you..

This concludes today's conference call. You may now disconnect..